Citigroup agreed Wednesday to pay $285 million to settle charges brought by the Securities and Exchange Commission, which charged that Citigroup’s principal U.S. broker-dealer subsidiary mislead investors in a $1 billion collateralized debt obligation transaction tied to the U.S. housing market. The SEC says that Citigroup bet against investors as the housing market showed signs of distress.
The CDO defaulted within months, leaving investors with losses while Citigroup made $160 million in fees and trading profits, the SEC said.
Citigroup consented to settle the SEC’s charges without admitting or denying the SEC’s allegations, the SEC said. The settlement, which is subject to court approval, requires Citigroup to pay $160 million in disgorgement plus $30 million in prejudgment interest and a $95 million penalty for a total of $285 million that will be returned to investors through a Fair Fund distribution.
The SEC alleges that Citigroup Global Markets structured and marketed a CDO called Class V Funding III and exercised significant influence over the selection of $500 million of the assets included in the CDO portfolio. Citigroup, the SEC said, “then took a proprietary short position against those mortgage-related assets from which it would profit if the assets declined in value. Citigroup did not disclose to investors its role in the asset selection process or that it took a short position against the assets it helped select.”